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Today's Stone Cold Steel Pipe Lock CAPS Short

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June 29, 2010 – Comments (28)

To borrow a phrase from ESPN's Mike & Mike in the Morning, I now bring you today's Stone Cold Steel Pipe Lock CAPS short.  I have not come this close to attempting to short a stock with real money since I was unable to borrow shares of Moody's (MCO) around a year ago.  The stock that I am so negative on is Tesla Motors (TSLA).

For those of you who aren't familiar with the company, and if you're not it likely means that you've been vacationing in a tropical island or searching for terrorists in Afghanistan without any access to television or the Internet, Tesla produces luxury plug-in electric vehicles.  It is scheduled to launch its IPO today at $17/share.

As someone who has worked in the auto industry for well over a decade, I have developed a sort of sixth sense that enables me to tell with fairly good accuracy which new models / companies will be successful and which ones will fail.  Ironically, I am actually rooting for plug-in electric vehicles to catch on so it pains me to say that I believe Tesla will likely die a long, slow death.

Let's look at the facts.

- Tesla was created by Elon Musk the founder of Pay Pal, not some automotive guru, the freaking founder of Pay Pal.  That's like buying into a car company founded by the always annoying Mark Cuban.  Not only does Musk have no experience in the auto industry, he's practically bankrupt.  You can say all you want that a person's private life shouldn't matter, but when the CEO of a company is going through a nasty divorce, it stands to reason that they might be a little distracted.  Musk plans to sell $20 million worth of Tesla stock in today's IPO.

- The company has never made a profit.  It lost 29.5 million dollars last quarter and 55.7 million dollars in 2009.

- The only reason that Tesla is still alive and kicking after the meltdown in the auto industry is the government in its infinite wisdom decided to provide it with $465 million worth of our tax dollars at a time when the country is running a massive deficit. 

- Tesla currently only has one model, a $100,000 roadster.  The roadster market is limited enough, let along the market for a one hundred thousand dollar plug-in vehicle with a limited range.

- Tesla is trying to develop a $50,000 plug-in electric sedan that might be available some time in 2012 (I'll believe that when I see it).  Meanwhile, real automakers are furiously working on developing plug-in vehicles that will likely be available some time later this year (Nissan Leaf / Chevrolet Volt)

- Small independent automakers don't work.  There's a long list of small companies in the auto industry that were at one time successful, but were unable to go it alone in the U.S. market...Saab, Hummer, Volvo, Jaguar, Land Rover, Daewoo, etc...  Eventually every one of these companies was forced to sell out to a major automaker or stop selling vehicles in the U.S.  Heck even Chrysler was a dead man walking until Fiat bailed them out.  There is only one company that I consider to be successful that sold as few as 20,000 units in 2009...Porsche.  Porsche isn't even independent any longer.  It was eventually bought out in a fascinating battle with Volkswagen.  And it would be an absolute miracle if Tesla sold even that many vehicles.  Small, independent automakers don't have the cost structure to compete in the uber-competitive U.S. market.

- Tesla doesn't have an extensive network of dealerships.  There are currently only 12 Tesla dealers. Most people who purchase luxury vehicles want to know that they'll have some place to service them.  They aren't going to want to go out of their way to drive all over the place to have their vehicle worked on or question whether the dealership that they bought their car from will even be there a year or two from now.  How ironic would it be if the place that you needed to drive to to have your Tesla serviced at was further away from your home than the car's driving range.  As idiotic as it sounds, with only 12 dealers, it's very possible. 

There are a few things that give me pause about shorting Tesla.  First and foremost as we learned in the dot com bubble, the market can remain irrational for long periods of time.  It is very possible, perhaps even likely that the share price of Tesla will rise well above its initial $17/share offering price.  The offering priced above its initial target of $14 - $16/share and it was oversubscribed.  I'm sure that a bunch of slimy hedge funds out there with connections are chomping at the bit to flip this thing in order to make a quick profit.

The current Tesla roadster is cool looking, fast as he-two-sticks, and gets an impressive 200+ miles per charge.  Those are attractive attributes, but it's one thing to build a handful of expensive, cool cars and completely another to do so in an industry (autos) that's almost as bad as the airline industry.

Toyota invested $50 million in Tesla.  That money is peanuts to a huge automaker like Toyota, but still is shows that there's at least some interest there.

Tesla is also partnering with Daimler (Mercedes-Benz's parent company) to develop an electric version of its Smart car.  It remains to be seen how successful that venture will be though.  Smart's sales have completely fallen off of a cliff and increased competition in the A- and B-Car segment is coming on fast.

Tesla is in the process of purchasing the recently closed NUMMI factory in Fremont, California.  It's difficult to say how much of this was because of the people who worked there and the way that it was run rather than the plant itself, but NUMMI has always been well-regarded in the industry.  If this transaction is finalized, Tesla will have a decent place to build its new sedan, if it ever gets that far.

Ultimately, I wouldn't be surprised in the least if Tesla was ultimately bought out by a large automaker that wanted access to its plug-in electric vehicle technology.  I don't think that there's enough certainty about the market for plug-ins today nor do I think that its technology is far enough along for someone to be interested in buying Tesla out in the near future, but it is possible down the road (so to speak, see the automotive reference ;) ),  Between now and then, the company's share price could fall quite a bit as it burns through cash and possibly needs to do another share offering to generate funds.

I sent an e-mail to the fine folks at CAPS yesterday requesting that they add TSLA to our beloved game.  It now exists.  I'm going to wait a little while to see what the initial pop is like, but I plan on shorting Tesla in CAPS some time today.

Deej 

28 Comments – Post Your Own

#1) On June 29, 2010 at 10:56 AM, JakilaTheHun (99.94) wrote:

Great write-up, as usual, Deej.

Seeking Alpha had several articles on TSLA today, but they also had one that touted an alternative IPO --- ZipCar:

http://seekingalpha.com/article/212187-will-zipcar-s-ipo-pay-off-better-than-the-tesla-ipo?source=hp_wc

Sounds like a much more intriguing business model to me than TSLA.  Of course, I'd have to try hard to convince myself (as a deep value investor) to buy an IPO.  All the same, the idea behind ZipCar reminds me a lot of the idea behind Netflix --- it just makes sense from a business perspective. 

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#2) On June 29, 2010 at 11:22 AM, TMFDeej (99.41) wrote:

Thanks Jakila.  As a general rule, I stay away from anything involved in the auto industry.  There's always exceptions, but few industries, outside of airlines, have the ability to destroy capital better than the auto sector.

Zip car is interesting.  I just wonder how trashed those things will be after thousands of random people who have little experience driving and little incentive to maintain the vehicles drive them all over congested cities, but I suppose one could say that about any rental car company.

Thanks for the heads up, I'll take a look as the Zip article.

See you around.

Deej 

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#3) On June 29, 2010 at 11:39 AM, Dobbes (< 20) wrote:

I'm also really down on TSLA.  However, experience tells me, 'sexy tech' stocks like this are subject to waves of euphoria that I have no business stepping in front of.  If it pops nicely, I'll red thumb it.  But I'm not expecting this thing to go straight down from the get go, and I am reluctant to take heat on it when I can simply wait.

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#4) On June 29, 2010 at 11:45 AM, portefeuille (99.60) wrote:

It was eventually bought out in a fascinating battle with Volkswagen.

not quite (see here).

 

There is only one company that I consider to be successful that sold as few as 20,000 units in 2009

in the U.S. maybe. "worldwide" sales were much higher.



enlarge

(from here)

 



enlarge

(from here)

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#5) On June 29, 2010 at 11:47 AM, portefeuille (99.60) wrote:

As someone who has worked in the auto industry for well over a decade, I have developed a sort of sixth sense that enables me to tell with fairly good accuracy which new models / companies will be successful and which ones will fail.

okay, post a short list please that can be revisited in a few years, hehe ...

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#6) On June 29, 2010 at 11:59 AM, TMFDeej (99.41) wrote:

It's difficult for me to be too harsh in a public forum, particularly given the fact that I rely on many of these companies to make a living.  I probably push the limits as it is.

I had better be good at picking winners and losers in the auto sector, given the fact that I've worked in it for like 100,000 hours. Most people would be an expert at anything they had spent so much time on.  I'm sure that there's something that you're an expert at as well.

Deej 

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#7) On June 29, 2010 at 12:05 PM, TMFDeej (99.41) wrote:

You're absolutely right, about Porsche selling vehicles globally. That only strengthens my argument that small, independent automakers cannot succeed.  Tesla is going to produce such a small number of vehicles it's almost impossible for them to succeed unless they create the flying, garbage-powered Delorean  from Back to the Future.

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#8) On June 29, 2010 at 12:14 PM, portefeuille (99.60) wrote:

I'm sure that there's something that you're an expert at as well.

you really want to fight, don't you, hehe ...

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#9) On June 29, 2010 at 12:15 PM, portefeuille (99.60) wrote:

That only strengthens my argument that small, independent automakers cannot succeed.

does it?

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#10) On June 29, 2010 at 12:23 PM, MegaEurope (21.46) wrote:

"There is only one company that I consider to be successful that sold as few as 20,000 units in 2009"

Rolls Royce?

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#11) On June 29, 2010 at 12:42 PM, bcnelson831 (79.89) wrote:

Does the fact that they are small now indicate that they will be small forever?

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#12) On June 29, 2010 at 12:45 PM, workfor (< 20) wrote:

I'm much more interested in Tesla the man than Tesla the car. He may have been the smartest man who ever lived. A car named after Tesla better be of the highest caliper. Edison made the history books, but Tesla was THE MAN!

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#13) On June 29, 2010 at 12:52 PM, topsecret09 (35.19) wrote:

 I completely agree. Stock will nosedive.... How many places are there to plug this thing In anyway ?   Remember this car ?  http://www.delorean.com/    :)   TS

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#14) On June 29, 2010 at 12:55 PM, portefeuille (99.60) wrote:

Porsche swings to loss as it works toward VW merger

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#15) On June 29, 2010 at 12:57 PM, topsecret09 (35.19) wrote:

 Tesla...    http://www.teslatheband.com/   Better Investment. Buy a CD or two....   : )

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#16) On June 29, 2010 at 1:27 PM, TMFDeej (99.41) wrote:

Hi Mega.  Rolls Royce is no longer an independent company, it is owned by BMW.  Prior to that it was owned by Volkswagen.  VW still owns RR's sister brand Bentley.

Deej 

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#17) On June 29, 2010 at 1:28 PM, blesto (31.81) wrote:

The Roadster itself may be the better investment.

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#18) On June 29, 2010 at 1:30 PM, TMFDeej (99.41) wrote:

Hey topsecret.  I love the Delorian.  I still freak out every time I see one on the street, though my sightings are becoming less and less frequent. 

It's not that the Delorian was an awesome car, just that it's sighting is such a rare occurrence.  I guess that it's like bird watching.  I feel the same way about the quirky VW Thing and Land Rover Defender.  

Deej 

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#19) On June 29, 2010 at 1:31 PM, TMFDeej (99.41) wrote:

Signs, signs, everywhere there's signs
Blockin' up the scenery, breakin' my mind
Do this, don't do that, can't you read the sign

HAHAHAH

 

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#20) On June 29, 2010 at 1:45 PM, johnnyluvsbeachs (71.69) wrote:

I completely agree with this take. Their (Tesla's) technology is the prize.

Now, how to short TSLA the day they go public? 

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#21) On June 29, 2010 at 1:47 PM, Turfscape (43.84) wrote:

TMFDeej wrote:
"The roadster market is limited enough, let along the market for a one hundred thousand dollar plug-in vehicle with a limited range."

Don't all vehicles have a limited range? I mean, my gasoline powered Ford Focus can only go about 290 or 300 miles, and then it stops due to lack of fuel. The bigger issue is how quickly can it recharge. And how quickly can the network of recharging stations grow.

I'm really pulling for Tesla Motors. Unfortunately, reality dictates that large automakers will go out of their way to crush the potential for competition before it can really take off on a national / global basis. I'm not as concerned about the recharging stations or lack of dealers...How many dealers did Harley-Davidson have three years into their existence? How many gas stations were there across the country in 1903? The demand for the vehicles will drive that growth...and the greater the demand, the faster the growth of those dependent businesses.

What will determine Tesla's success is its ability to differentiate from the mass-produced electric vehicles. Their Roadster and Sedan cannot go head-to-head with the Nissan Leaf, nor should it. But, will they allow themselves to be pulled into that kind of a fight? Or will they market on unique design and high-end "cache'", thereby creating a value proposition for those with $50,000 to waste on transportation?

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#22) On June 29, 2010 at 2:54 PM, chk999 (99.97) wrote:

I think the chances that Tesla the company is successfull are roughly the same as that I will become a rock star: Not zero, but no sane person would bet that it will happen.

However in the short run I expect a run up in the stock, so I am holding off on making the underperform call.

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#23) On June 29, 2010 at 3:23 PM, TMFDeej (99.41) wrote:

Excellent call, chk999.  I thought that once TSLA lost steam earlier this morning that it was safe to short.  Man, that thing took off like a rocket late in the day:

This reminds me why I don't short stocks in real life.  I'm glad I decided not to this time.  Phew :). That would have been aggravating.  I much prefer going long safer, cheap companies, that pay me dividends to wait for some sort of catalyst to occur that will unlock value.  It's better for my peace of mind.

Deej 

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#24) On June 29, 2010 at 4:33 PM, Dobbes (< 20) wrote:

I came back to check this thread to see if anyone stepped in front of the bus today.  Like chk, I posted that I would be content to wait until the IPO cooled off to take a position. I must say I was very tempted with all I've been reading about the company to just make a call outright.  I thought it'd go up, but I never thought it'd do this...

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#25) On June 29, 2010 at 8:06 PM, ralphmachio (24.78) wrote:

I almost shorted TSLA today, but a deep wave of DON'T DO IT! prevented me from pulling the trigger. I was pretty sure it was my absolute love for the idea of electric cars, but reflecting on the situation, maybe it was my sense of self preservation. 

I once owned a Puma, 77 gte. It was a Brazilian sports car based off a VW aircooled Engine and Chasis. Pretty much a Carmin Ghea minus 400 lbs, and wider and shorter, with the engine bored to 2l. It was crazy, and made me appreciate rear engine/rear wheel drive cars such as the 911. Too much fun! Too many tickets, so I sold it;(

Port mentioned the Porsche, and I started to daydream, sorry. I cannot in good conscience short a company that I love!  Just like I don't feel right buying a company I hate.  I don't even like shorting BP because I will eventually have to put in a buy order!

I may have to join the TSLA insanity, just out of love for the concept, and the name, and NO, I could care less about the band, but am completely impressed by the man. I would look at it as a short to medium term trade, cause soon I'm predicting a one day sale - EVERYTHING MUST GO, (But for a few days), not to cause controversy, or ruin anyones day. Hey, it's never too late to learn to love to short!

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#26) On June 30, 2010 at 9:36 AM, TMFDeej (99.41) wrote:

Here's an interesting valuation of the company that I just came across in an Automotive Snooze, er um Automotive News article:

At the original midpoint price of $15, Tesla was valued at 5.5 times its net tangible assets, a measure of shareholder equity that excludes assets that can't be sold in liquidation. That's triple the median 1.82 times for automotive companies globally, data compiled by Bloomberg show.

TLSA is now trading at nearly $24/share.  It is waaayyy overvalued.

Deej 

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#27) On June 30, 2010 at 2:57 PM, oSUNo (52.96) wrote:

I'd say you're probably wrong because of the level of expertize required to fill out all the forms. Also because it's cool, that's all.

 

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#28) On July 25, 2010 at 11:41 PM, BrandonPaulChevy (< 20) wrote:

well, as the struggle of tesla continues, i guess daewoo has its own struggles also. Right now they are in trouble with daewoo parts coz they are forced to lessen the quality of their cars.

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